In our most likely forecast which we have given a 50 per cent probability, a successful global roll-out of various vaccines proves effective. The impact of this is that US and European economies have to negotiate an “air pocket” between now and then, which means they could see very weak growth in Q4 and possibly Q1 next year, but economic activity picks up very strongly in Q2 and Q3 of 2021. Asia is ahead of the pack, but the revival in global trade boosts China’s prospects too. This scenario sees pent-up demand come through, while household and corporate savings and cash balances are high in a number of countries, leverage is low.
With vaccines on the horizon, the upshot is that much of the world reaches herd immunity levels during 2021 and it proves possible to start fully reopening economies from Q2 onwards. It appears we now have at least three vaccines that have proved to be remarkably effective in third-stage clinical trials, which give a reason for optimism. A 95+ per cent efficacy will prompt a faster return to “normal” economic activity. Highly effective vaccines reduce downside risk from the current COVID-19 surge in the US and Europe, will help lift longer-term growth expectations, and are a tailwind for cyclicals and bond yields. If we assume that it takes six months for broad distribution and inoculation in developed economies, we can look to the northern hemisphere summer of 2021 for a reasonable return to normalcy.
With better days ahead and with over $1.5 trillion accumulated in excess cash balances built up over the past few quarters in the US alone, it’s hard to believe a large part of that won’t be run down in the event of a successful vaccine roll-out. The excess level of savings could fuel a strong, persistent increase in demand and the global economy could be set up for another roaring 20s. At least global markets expect so. We are buyers of the inevitable pullbacks on growth worries and salute the ingenuity of the scientists, companies, and government partnerships that can get us all to dream realistically of the end of the pandemic. The market will reflect these dreams, but velocity of price is something to look out for as is the durability of the cyclicals over the growth trade past the next few months.
Fiscal and monetary policy will remain a support for financial markets and the global economy. China, like many emerging markets is now left with little room to cut rates and instead the country’s prospect for recovery will largely depend on the policy space for increased fiscal spending. Additional stimulus in China will likely benefit Chinese equities further into 2021. We continue to favour Asian equity markets with close ties to the more resilient sectors of the mainland Chinese economy. We anticipate that the Chinese yuan will likely remain strong, benefitting Asian FX such as Korean won, Malaysian ringgit and Taiwanese dollar which have high beta to the yuan. Compared to the start of the year, the outlook is certainly looking more positive.
Shamik Dhar, chief economist, BNY Mellon Investment Management
